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Short Horizon Reversals and the Bid-Ask Spread

  • Author(s): Jegadeesh, Narasimhan
  • Titman, Sheridan
  • et al.
Abstract

This paper shows that the pattern of short term negative serial covariances for stock returns over different return measurement intervals is consistent with the implications of inventory-based market microstructure models. The results of the tests developed in this paper indicate that the short horizon return reversals can to a large extent be explained by transitory components in prices related to imbalances in specialists’ inventory positions. The evidence also suggests that the stock market may be as liquid or resilient as suggested by some earlier studies.

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